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EX-31.2 - VANTAGESOUTH BANCSHARES, INC.v165485_ex31-2.htm
EX-32.1 - VANTAGESOUTH BANCSHARES, INC.v165485_ex32-1.htm
EX-32.2 - VANTAGESOUTH BANCSHARES, INC.v165485_ex32-2.htm
EX-31.1 - VANTAGESOUTH BANCSHARES, INC.v165485_ex31-1.htm
EX-10.25 - VANTAGESOUTH BANCSHARES, INC.v165485_ex10-25.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________

Commission File Number 000-32951

CRESCENT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

NORTH CAROLINA
56-2259050
(State or other jurisdiction of Incorporation
(IRS Employer Identification Number)
or organization)
 

1005 HIGH HOUSE ROAD, CARY, NORTH CAROLINA
27513
(Address of principal executive offices)
(Zip Code)

(919) 460-7770
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x        No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨        No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨         No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 par value 9,626,559 shares outstanding as of November 9, 2009

 

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS


     
Page No.
       
Part I.
FINANCIAL INFORMATION
   
       
Item 1 -
Financial Statements (Unaudited)
   
       
 
Consolidated Balance Sheets
   
 
September 30, 2009 (unaudited) and December 31, 2008
 
3
       
 
Consolidated Statements of Operations
   
 
Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)
 
4
       
 
Consolidated Statements of Comprehensive Income
   
 
Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)
 
5
       
 
Consolidated Statement of Stockholders’ Equity
   
 
Nine Months Ended September 30, 2009 (unaudited)
 
6
       
 
Consolidated Statements of Cash Flows
   
 
Nine Months Ended September 30, 2009 and 2008 (unaudited)
 
7
       
 
Notes to Consolidated Financial Statements
 
8 - 21
       
Item 2 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
22 – 39
       
Item 3 -
Quantitative and Qualitative Disclosures about Market Risk
 
40
       
Item 4T -    
Controls and Procedures
 
40
       
Part II.
Other Information
   
       
Item 1 -
 Legal Proceedings
 
41
       
Item 1a -
Risk Factors
 
41
       
Item 2 -
Unregistered Sales of Equity Securities and Use of Proceeds
 
41
       
Item 3 -
Defaults Upon Senior Debt
 
41
       
Item 4 -
Submission of Matters to a Vote of Security Holders
 
41
       
Item 5 -
Other Information
 
41
       
Item 6 -
Exhibits
 
41

 
- 2 -

 

Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

 
   
September 30, 2009
   
December 31,
 
   
(Unaudited)
     
2008*
 
ASSETS
             
                 
Cash and due from banks
  $ 7,841,334     $ 9,917,277  
Interest-earning deposits with banks
    4,436,146       266,512  
Federal funds sold
    5,545,000       99,000  
Investment securities available for sale, at fair value
    198,309,418       105,648,618  
Loans
    771,996,633       785,377,283  
Allowance for loan losses
    (13,782,000 )     (12,585,000 )
NET LOANS
    758,214,633       772,792,283  
Accrued interest receivable
    4,255,378       3,341,258  
Federal Home Loan Bank stock, at cost
    11,776,500       7,264,000  
Bank premises and equipment, net
    11,945,611       10,845,049  
Investment in life insurance
    17,444,371       16,811,918  
Goodwill
    30,233,049       30,233,049  
Other assets
    13,701,887       11,091,784  
TOTAL ASSETS
  $ 1,063,703,327     $ 968,310,748  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Deposits
               
Demand
  $ 66,947,119     $ 63,945,717  
Savings
    59,973,050       58,833,876  
Money market and NOW
    148,560,074       130,542,569  
Time
    438,702,295       461,560,593  
TOTAL DEPOSITS
    714,182,538       714,882,755  
                 
Short-term borrowings
    88,000,000       37,706,000  
Long-term borrowings
    133,748,000       116,748,000  
Accrued expenses and other liabilities
    4,258,075       3,882,385  
TOTAL LIABILITIES
    940,188,613       873,219,140  
COMMITMENTS (Note B)
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, no par value, 5,000,000 shares authorized, 24,900 shares issued and outstanding on September 30, 2009
    22,797,940       -  
Common stock, $1 par value, 20,000,000 shares authorized; 9,626,559 shares outstanding September 30, 2009 and December 31, 2008
    9,626,559       9,626,559  
Common stock warrants
    2,367,368       -  
Additional paid-in capital
    74,483,619       74,349,299  
Retained earnings
    11,297,788       10,488,628  
Accumulated other comprehensive income
    2,941,440       627,122  
TOTAL STOCKHOLDERS’ EQUITY
    123,514,714       95,091,608  
TOTAL LIABILITIES AND
               
STOCKHOLDERS’ EQUITY
  $ 1,063,703,327     $ 968,310,748  
 
* Derived from audited consolidated financial statements.
 
See accompanying notes.

 
- 3 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Nine Month Periods Ended September 30, 2009 and 2008

 
   
Three-month Periods
   
Nine-month Periods
 
   
Ended September 30,
   
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
INTEREST INCOME
                       
Loans
  $ 11,986,538     $ 12,570,944     $ 36,089,299     $ 36,978,349  
Investment securities available for sale
    2,081,011       1,206,343       6,133,383       3,639,786  
Federal funds sold and interest-earning deposits
    1,014       16,763       8,349       74,971  
                                 
TOTAL INTEREST INCOME
    14,068,563       13,794,050       42,231,031       40,693,106  
                                 
INTEREST EXPENSE
                               
Deposits
    4,885,179       5,953,339       15,196,846       17,164,617  
Short-term borrowings
    507,004       125,860       1,476,614       333,463  
Long-term borrowings
    1,265,254       1,371,992       3,646,362       4,036,486  
                                 
TOTAL INTEREST EXPENSE
    6,657,437       7,451,191       20,319,822       21,534,566  
                                 
NET INTEREST INCOME
    7,411,126       6,342,859       21,911,209       19,158,540  
PROVISION FOR LOAN LOSSES
    1,957,526       1,281,471       4,786,505       2,547,178  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    5,453,600       5,061,388       17,124,704       16,611,362  
                                 
NON-INTEREST INCOME
                               
Mortgage loan origination revenue
    223,278       188,952       735,113       511,561  
Fees on deposit accounts
    423,775       414,177       1,207,485       1,177,331  
Earnings on life insurance
    225,022       188,823       660,150       431,294  
Gain (loss) on disposal of assets
    20       (2,169 )     (480 )     (1,346 )
Gain on sale of available for sale securities
    109,777       -       109,777       15,535  
Loss on impairment of nonmarketable equity security
    -       -       (406,802 )     -  
Other
    146,573       268,973       363,774       622,907  
                                 
TOTAL NON-INTEREST INCOME
    1,128,445       1,058,756       2,669,017       2,757,282  
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    3,030,101       2,881,444       9,018,527       8,602,773  
Occupancy and equipment
    951,473       709,164       2,606,593       2,027,775  
Data processing
    358,236       269,567       1,109,895       801,559  
FDIC insurance premiums
    309,916       102,935       1,331,504       295,403  
Other
    1,237,467       1,104,707       3,733,934       3,527,296  
                                 
TOTAL NON-INTEREST EXPENSE
    5,887,193       5,067,817       17,800,453       15,254,806  
                                 
INCOME BEFORE INCOME TAXES
    694,852       1,052,327       1,993,268       4,113,838  
                                 
INCOME TAXES
    58,100       306,300       171,800       1,336,800  
                                 
NET INCOME
    636,752       746,027       1,821,468       2,777,038  
                                 
Effective dividend on preferred stock (Note G)
    422,443       -       1,012,308       -  
                                 
Net income available to common shareholders
  $ 214,309     $ 746,027     $ 809,160     $ 2,777,038  
NET INCOME PER COMMON SHARE
                               
Basic
  $ .02     $ .08     $ .08     $ .29  
Diluted
  $ .02     $ .08     $ .08     $ .29  
WEIGHTED AVERAGE COMMON  SHARES OUTSTANDING (Note C)
                               
Basic
    9,569,290       9,548,589       9,569,290       9,478,117  
Diluted
    9,606,186       9,628,147       9,585,422       9,642,969  
 
See accompanying notes.

 
- 4 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three and Nine Month Periods Ended September 30, 2009 and 2008

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income
  $ 636,752     $ 746,027     $ 1,821,468     $ 2,777,038  
                                 
Other comprehensive income (loss):
                               
Securities available for sale:
                               
Unrealized holding gains (losses) on available for sale securities
    3,429,112       (1,221,550 )     4,226,163       (1,631,094 )
Tax effect
    (1,323,950 )     471,706       (1,631,244 )     629,602  
Reclassification of (gains) losses recognized in net income
    (109,777 )     -       (109,777 )     (15,535 )
Tax effect
    42,319       -       42,319       5,989  
Net of tax amount
    2,037,704       (749,844 )     2,527,461       (1,011,038 )
Cash flow hedging activities:
                               
Unrealized holding loss on cash flow hedging activities
    (194,916 )     -       (346,857 )     -  
Tax effect
    74,714       -       133,714       -  
Net of tax amount
    (120,202 )     -       (213,143 )     -  
                                 
Total other comprehensive income (loss)
    1,917,502       (749,844 )     2,314,318       (1,011,038 )
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 2,554,254     $ (3,817 )   $ 4,135,786     $ 1,766,000  
 
See accompanying notes.

 
- 5 -

 
 
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

 
                                             
Accumulated
       
                           
Common
   
Additional
         
Other
   
Total
 
   
Preferred stock
   
Common stock
   
stock
   
paid-in
   
Retained
   
Comprehensive
   
stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
warrants
   
Capital
   
earnings
   
income
   
equity
 
                                                       
Balance at December 31, 2008 -
  $ -       9,626,559     $ 9,626,559     $ -     $ 74,349,299     $ 10,488,628     $ 627,122     $ 95,091,608        
                                                                       
Net income
    -       -       -       -       -       -       1,821,468       -       1,821,468  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       -       2,314,318       2,314,318  
                                                                         
Expense recognized in connection  with stock options and restricted  stock
    -       -       -       -       -       134,320       -       -       134,320  
                                                                         
Preferred stock transaction:
                                                                       
Issuance of preferred stock
    24,900       24,900,000       -       -       -       -       -       -       24,900,000  
                                                                         
Discount on preferred stock
    -       (2,367,368 )     -       -       2,367,368       -       -       -       -  
                                                                         
Accretion of discount
    -       265,308       -       -       -       -       (265,308 )     -       -  
Preferred stock dividend
    -       -       -       -       -       -       (747,000 )     -       (747,000 )
                                                                         
Balance at September 30, 2009
    24,900     $ 22,797,940       9,626,559     $ 9,626,559     $ 2,367,368     $ 74,483,619     $ 11,297,788     $ 2,941,440     $ 123,514,714  
 
See accompanying notes.
 
 
- 6 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2009 and 2008

 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 1,821,468     $ 2,777,038  
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation
    690,888       585,491  
Provision for loan losses
    4,786,505       2,547,178  
Amortization of core deposit premium
    100,012       100,012  
Deferred income taxes
    (615,901 )     (479,000 )
Loss on impairment of nonmarketable equity security
    406,802       -  
Gain on sale of available of sale securities
    (109,777 )     (15,535 )
Loss on disposal of other real estate owned
    45,076       74,800  
(Gain) loss on disposal of assets
    480       1,346  
Net amortization (accretion) of premiums/discounts on securities
    727,295       (66,910 )
Accretion of loan discount
    (146,607 )     (329,865 )
Amortization of deposit premium
    82,298       139,162  
Net increase in cash value of life insurance
    (632,455 )     (394,077 )
Stock based compensation
    134,320       160,457  
Change in assets and liabilities:
               
(Increase) decrease in accrued interest receivable
    (914,120 )     433,983  
(Increase) in other assets
    (532,263 )     (1,621,266 )
Decrease (increase) in accrued interest payable
    (237,213 )     82,915  
Increase (decrease) in other liabilities
    399,763       314,062  
TOTAL ADJUSTMENTS
    4,185,103       1,532,753  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    6,006,571       4,309,791  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of investment securities available for sale
    (130,544,840 )     (18,911,004 )
Principal repayments of investment securities available for sale
    30,635,630       10,548,208  
Proceeds from sale of securities available for sale
    10,743,929       1,543,197  
Purchase of Federal Home Loan Bank stock
    (4,512,500 )     (473,300 )
Proceeds from disposal of foreclosed real estate
    4,559,220       566,790  
Net (increase) decrease in loans
    1,779,126       (95,239,479 )
Investment in life insurance
    -       (7,000,000 )
Purchases of bank premises and equipment
    (1,791,930 )     (2,789,271 )
                 
NET CASH USED BY INVESTING ACTIVITIES
    (89,131,365 )     (111,754,859 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in deposits:
               
Demand
    3,001,402       226,478  
Savings
    1,139,174       (46,302,557 )
Money market and NOW
    18,017,505       40,114,210  
Time deposits
    (22,940,596 )     112,034,601  
Net increase in short-term borrowings
    50,294,000       6,245,000  
Net increase in long-term borrowings
    17,000,000       4,500,000  
Proceeds from stock options exercised
    -       615,500  
Proceeds from issuance of preferred stock
    24,900,000       -  
Dividends paid on preferred stock
    (747,000 )     -  
Excess tax benefits from stock options exercised
    -       91,700  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    90,664,485       117,524,932  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    7,539,691       10,079,864  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    10,282,789       12,356,404  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 17,822,480     $ 22,436,268  
 
See accompanying notes.
 
 
- 7 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE A - BASIS OF PRESENTATION
In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and nine-month periods ended September 30, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America. The financial statements include the accounts of Crescent Financial Corporation (the “Company”, “we”, “our”, “Crescent”) and its wholly owned subsidiary, Crescent State Bank (the “Bank”).  All significant inter-company transactions and balances are eliminated in consolidation.  Operating results for the three and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2009.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2008 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

Subsequent events have been evaluated through November 10, 2009, which is the date of financial statement issuance.

Prior period amounts may have been reclassified for proper presentation.  The Company reclassified $2,000 and $75,000 of net losses on the sale of other real estate owned for the three and nine- month periods ended September 30, 2008, respectively, from non-interest income to non-interest expense.

NOTE B - COMMITMENTS
At September 30, 2009, commitments are as follows:

Undisbursed lines of credit
  $ 146,890,000  
Stand-by letters of credit
    4,049,000  
Undisbursed commitment to purchase additional investment in Small Business Investment Corporation
    363,000  

NOTE C - PER SHARE RESULTS
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate to outstanding stock options, restricted stock and the common stock warrant issued to the US Treasury and are determined using the treasury stock method.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Weighted average number of shares used in computing basic net income per share
    9,569,290       9,548,589       9,569,290       9,478,117  
Effect of dilutive stock options
    36,896       79,558       16,132       164,852  
                                 
Weighted average number of shares used in computing diluted net  income per share
    9,606,186       9,628,147       9,585,422       9,642,969  

 
- 8 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE C - PER SHARE RESULTS (Continued)
Options and warrants to purchase shares that have been excluded from the determination of diluted earnings per share because they were antidilutive (the exercise price is higher than the average current market price for the period) amount to 1,138,482 and 93,163 shares for the three-month periods ended September 30, 2009 and 2008, respectively, and 1,262,717 and 67,029 shares for the nine-month periods ended September 30, 2009 and 2008, respectively.
 
NOTE D - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification.  All mortgage-backed securities and collateralized mortgage obligations represent securities issued by a government sponsored enterprise (i.e. Government National Mortgage Association, Federal Home Loan Mortgage Corporation or Federal National Mortgage Association) where the underlying collateral consists of conforming residential home mortgage loans.

   
September 30, 2009
 
       
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Securities available for sale:
                       
U.S. government securities and obligations of U.S. government agencies
  $ 16,676,072     $ 480,010     $ 1,708     $ 17,154,374  
Mortgage-backed
    56,378,994       1,947,002       -       58,325,996  
Collateralized mortgage obligations
    76,248,556       1,732,676       64,380       77,916,852  
Municipals
    43,281,539       1,405,841       137,630       44,549,750  
Other equity securities
    590,678       -       228,232       362,446  
                                 
    $ 193,175,839     $ 5,565,529     $ 431,950     $ 198,309,418  

   
December 31, 2008
 
       
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Securities available for sale:
                       
U.S. government securities and obligations of U.S. government agencies
  $ 10,664,833     $ 169,315     $ 2,313     $ 10,831,835  
Mortgage-backed
    67,308,567       1,707,655       39,863       68,976,359  
Municipals
    26,089,420       177,788       917,537       25,349,671  
Other equity securities
    565,255       4,989       79,491       490,753  
                                 
    $ 104,628,075     $ 2,059,747     $ 1,039,204     $ 105,648,618  
 
Proceeds from sales of available for sale securities in 2009 totaled $10,743,929 resulting in gross gains of $109,777 and no losses.  Proceeds from sales of available for sale securities in 2008 totaled $1,543,197 resulting in gross gains of $15,535 and no losses.
 
 
- 9 -

 
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE D - INVESTMENT SECURITIES (Continued)
The following tables show investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2009 and December 31, 2008. The September 30, 2009 unrealized losses on investment securities relate to one U.S. Government agency security, six collateralized mortgage obligations, six municipal securities and two marketable equity securities. The December 31, 2008 unrealized losses on investment securities relate to two U.S. Government agency securities, nine mortgage-backed securities, twenty-six municipal securities and one marketable equity security. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased.  The unrealized losses will reverse at maturity or prior to maturity if market interest rates decline to levels that existed when the securities were purchased.  Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

   
September 30, 2009
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
value
   
losses
   
value
   
losses
   
value
   
losses
 
Securities available for sale:
                                   
U.S. government securities and obligations of U.S. government agencies
  $ 3,406,139     $ 1,708     $ -     $ -     $ 3,406,139     $ 1,708  
Mortgage-backed
    -       -       -       -       -       -  
Collateralized mortgage Obligations
    8,630,276       64,380       -       -       8,630,276       64,380  
Municipals
    887,021       7,205       2,949,443       130,425       3,836,464       137,630  
Marketable equity
    269,247       42,033       93,199       186,199       362,446       228,232  
                                                 
Total temporarily impaired securities
  $ 13,192,683     $ 115,326     $ 3,042,642     $ 316,624     $ 16,235,325     $ 431,950  

   
December 31, 2008
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
value
   
losses
   
value
   
losses
   
value
   
losses
 
Securities available for sale:
                                   
U.S. government securities and obligations of U.S. government agencies
  $ 972,624     $ 2,313     $ -     $ -     $ 972,624     $ 2,313  
Mortgage-backed
    1,768,974       22,558       1,097,179       17,305       2,866,153       39,863  
Collateralized mortgage Obligations
    -       -       -       -       -       -  
Municipals
    13,246,896       755,550       986,586       161,987       14,233,482       917,537  
Marketable equity
    -       -       206,366       79,491       206,366       79,491  
                                                 
Total temporarily impaired securities
  $ 15,988,494     $ 780,421     $ 2,290,131     $ 258,783     $ 18,278,625     $ 1,039,204  
 
 
- 10 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE D - INVESTMENT SECURITIES (Continued)
At September 30, 2009 and December 31, 2008, investment securities with a carrying value of $90,042,111 and $63,602,694, respectively, were pledged to secure public deposits, borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of securities available for sale at September 30, 2009 by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Amortized
   
Fair
 
   
cost
   
value
 
             
Due within one year
  $ 28,771,262     $ 29,660,188  
Due after one year through five years
    99,953,380       102,541,461  
Due after five years through ten years
    41,731,300       42,850,135  
Due after ten years
    22,129,219       22,895,188  
Other equity securities
    590,678       632,446  
                 
    $ 193,175,839     $ 198,309,418  

At September 30, 2009, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company is $11.8 million.  On August 12, 2009, FHLB declared an annualized dividend for the second quarter of 0.84% and announced that it would continue its previously disclosed practice of not repurchasing activity-based excess capital stock held by members.  The FHLB will continue to evaluate quarterly whether to repurchase excess stock.  Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of September 30, 2009 or December 31, 2008.  Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.

NOTE E – DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, currently in the form of interest rate swaps, to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate, and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the accompanying financial statements and are measured at fair value. Subsequent changes in the derivatives’ fair values are recognized in earnings unless specific hedge accounting criteria are met.

Crescent has established objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. Interest rate risk is monitored via simulation modeling reports. The goal of the Company’s asset/liability management efforts is to maintain profitable financial leverage within established risk parameters. Crescent has entered into several financial arrangements using derivatives during 2009 to add stability to interest income and to manage its exposure to interest rate movements.
 
 
- 11 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Cash Flow Hedges
Through a special purpose entity (see Note G of Item 8 in Crescent’s 2008 Form 10-K) the Company issued trust preferred debentures in 2003.  In 2007, the Company entered into a subordinated term loan agreement with a non-affiliated financial institution.  These instruments, as more fully described in the Note G of Item 8 in the Company’s 2008 Form 10-K, were issued as part of its capital management strategy. These instruments are variable rate and expose the Company to interest rate risk caused by the variability of expected future interest expense attributable to changes in 3-month LIBOR. To mitigate this exposure to fluctuations in cash flows resulting from changes in interest rates, the Company entered into four pay-fixed interest rate swap agreements in June 2009.

Based on the evaluation performed at inception and through the current date, these derivative instruments qualify for cash flow hedge accounting. Therefore, the cumulative change in fair value of the interest rate swaps, to the extent that it is expected to be offset by the cumulative change in anticipated interest cash flows from the hedged trust preferred debenture and subordinated term loan, will be deferred and reported as a component of other comprehensive income (“OCI”). Any hedge ineffectiveness will be charged to current earnings.

Since the floating index and reset dates are based on identical terms, management believes that the hedge relationship of the cumulative changes in expected future cash flows from the interest rate swaps and the cumulative changes in expected interest cash flows from the trust-preferred debentures and subordinated term loan agreement will be highly effective. For the three and nine months ended September 30, 2009, management has determined that there is no hedge ineffectiveness.

The notional amount of the debt obligations being hedged was $15.5 million and the fair value of the interest rate swap liability, which is recorded in accrued expenses and other liabilities at September 30, 2009, was an unrealized loss of $346,857.

The following table discloses the location and fair value amounts of derivative instruments designated as hedging instruments under SFAS No. 133 in the consolidated balance sheets.

 
September 30, 2009
 
           
Estimated Fair
 
 
Balance Sheet
 
Notional
   
Value of
 
 
Location
 
Asset(Liability)
   
Amount
 
               
Trust preferred securities:
             
Interest rate swap
Other liabilities
  $ 4,000,000     $ (75,254 )
Interest rate swap
Other liabilities
    4,000,000       (103,362 )
                   
Subordinated term loan agreements:
                 
Interest rate swap
Other liabilities
    3,750,000       (70,922 )
Interest rate swap
Other liabilities
    3,750,000       (97,319 )
      $ 15,500,000     $ (346,857 )

See Note F for additional information.

The following table discloses activity in accumulated OCI related to the interest rate swaps during the nine month period ended September 30, 2009.

 
- 12 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
   
September 30, 2009
 
       
Accumulated OCI resulting from interest rate swaps as of January 1, net of tax
  $ -  
Other comprehensive loss recognized during nine month period ended September 30, net of tax
    (213,143 )
Accumulated OCI resulting from interest rate swaps as of September 30, net of tax
  $ (213,143 )

The Company monitors the credit risk of the interest rate swap counterparty.

NOTE F - FAIR VALUE MEASUREMENT
Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. See Note H for discussion concerning recent guidance for transactions that are not orderly. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the fair value hierarchy.

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of September 30, 2009, the Company carried certain marketable equity securities at fair value hierarchy Level 1.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of September 30, 2009, the types of financial assets and liabilities the Company carried at fair value hierarchy Level 2 included securities available for sale, impaired loans secured by real estate and derivative liabilities.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions. As of September 30, 2009, while the Company did not carry any financial assets or liabilities, measured on a recurring basis, at fair value hierarchy Level 3, the Company did value certain financial assets, measured on a non-recurring basis, at fair value hierarchy Level 3.

 
- 13 -

 
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE F - FAIR VALUE MEASUREMENT (Continued)
Fair Value on a Recurring Basis.  The Company measures certain assets at fair value on a recurring basis, as described below.

Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Derivative Liabilities
Derivative instruments at September 30, 2009 include interest rate swaps and are valued using models developed by third-party providers. This type of derivative is classified as Level 2 within the valuation hierarchy.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Fair Value on a Nonrecurring Basis.  The Company measures certain assets and liabilities at fair value on a nonrecurring basis, as described below.

Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan or asset as nonrecurring Level 2. When current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan or asset as nonrecurring Level 3.   There were $40.5 million in impaired loans at September 30, 2009, of which $22.4 million in loans showed impairment and had a specific reserve of $5.7 million.  Impaired loans totaled $16.7 million at December 31, 2008.  Of such loans, $11.6 million had specific loss allowances aggregating $4.1 million at that date.
         
 
- 14 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE F - FAIR VALUE MEASUREMENT (Continued)
Foreclosed Real Estate
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at fair value subject to future impairment. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Below is a table that presents information about assets measured at fair value at September 30, 2009 and December 31, 2008:

               
Fair Value Measurements at
 
               
September 30, 2009, Using
 
   
Total Carrying
                         
   
Amount in The
         
Quoted Prices
   
Significant
       
   
Consolidated
   
Assets/(Liabilities)
   
in Active
   
Other
   
Significant
 
   
Balance
   
Measured at
   
Markets for
   
Observable
   
Unobservable
 
   
Sheet
   
Fair Value
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
9/30/2009
   
9/30/2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                               
Securities available for sale:
                             
U.S. Government  obligations and agency
  $ 17,154,374     $ 17,154,374     $ -     $ 17,154,374     $ -  
Mortgage-backed
    58,325,996       58,325,996       -       58,325,996       -  
Collateralized  mortgage  obligations
    77,916,852       77,916,852       -       77,916,852       -  
Municipals
    44,549,750       44,549,750       -       44,549,750       -  
Marketable equity
    362,446       362,446       362,446       -       -  
                                         
Foreclosed real estate
    5,295,562       5,295,562       -       -       5,295,562  
Impaired loans
    16,687,266       16,687,266       -       15,632,995       1,054,271  
Derivative liabilities
    (346,857 )     (346,857 )     -       (346,857 )     -  

               
Fair Value Measurements at
 
               
December 31, 2008, Using
 
   
Total Carrying
                         
   
Amount in The
         
Quoted Prices
   
Significant
       
   
Consolidated
   
Assets/(Liabilities)
   
in Active
   
Other
   
Significant
 
   
Balance
   
Measured at
   
Markets for
   
Observable
   
Unobservable
 
   
Sheet
   
Fair Value
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
12/31/2008
   
12/31/2008
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                               
Securities available for sale
  $ 105,648,618     $ 105,648,618     $ 490,753     $ 105,157,865     $ -  
Foreclosed real estate
    1,716,207       1,716,207       -       -